Attached files
file | filename |
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EX-32.1 - EX-32.1 - Sierra Income Corp | d533311dex321.htm |
EX-31.1 - EX-31.1 - Sierra Income Corp | d533311dex311.htm |
EX-31.2 - EX-31.2 - Sierra Income Corp | d533311dex312.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 814-00924
Sierra Income Corporation
(Exact name of registrant as specified in its charter)
Maryland | 45-2544432 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
375 Park Avenue, 33rd Floor
New York, NY 10152
(Address of principal executive offices)
(212) 759-0777
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 1, 2013, the Registrant had 5,056,474 shares of common stock, $0.001 par value, outstanding.
Table of Contents
Page | ||||||
Part I. |
Financial Information | |||||
Item 1. |
Financial Statements | F-1 | ||||
Statements of Assets and Liabilities as of March 31, 2013 (unaudited) and December 31, 2012 |
F-1 | |||||
Statements of Operations for the three months ended March 31, 2013 and March 31, 2012 (unaudited) |
F-2 | |||||
F-3 | ||||||
Statements of Cash Flows for the three months ended March 31, 2013 and March 31, 2012 (unaudited) |
F-4 | |||||
Schedules of Investments as of March 31, 2013 (unaudited) and December 31, 2012 |
F-5 | |||||
F-9 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 1 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 10 | ||||
Item 4. |
Controls and Procedures | 11 | ||||
Part II. |
Other Information | |||||
Item 1. |
Legal Proceedings | 12 | ||||
Item 1A. |
Risk Factors | 12 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 12 | ||||
Item 3. |
Defaults Upon Senior Securities | 12 | ||||
Item 4. |
Mine Safety Disclosures | 12 | ||||
Item 5. |
Other Information | 12 | ||||
Item 6. |
Exhibits | 13 | ||||
14 |
Table of Contents
Part I. Financial Information
Sierra Income Corporation
Statements of Assets and Liabilities
As of | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Non-Controlled/Non-Affiliated investments at fair value (amortized cost of $48,867,138 and $30,599,349, respectively) |
$ | 49,594,297 | $ | 30,580,211 | ||||
Cash and cash equivalents |
3,884,721 | 6,651,767 | ||||||
Interest receivable |
1,093,230 | 784,637 | ||||||
Due from affiliate (Note 6) |
997,095 | 814,814 | ||||||
Unsettled trade receivables |
503,750 | | ||||||
Prepaid expenses and other assets |
41,048 | 8,949 | ||||||
|
|
|
|
|||||
Total assets |
$ | 56,114,141 | $ | 38,840,378 | ||||
|
|
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|
|||||
LIABILITIES |
||||||||
Due to prime broker |
$ | 12,669,103 | $ | 17,345,794 | ||||
Unsettled trades payable |
6,585,675 | | ||||||
Accounts payable and accrued expenses |
696,518 | 504,442 | ||||||
Management fee |
245,499 | 171,317 | ||||||
Provisional incentive fee |
149,263 | 628 | ||||||
Administrator fees |
138,090 | 128,459 | ||||||
Due to affiliate |
40,690 | 55,927 | ||||||
Interest payable |
11,012 | 10,829 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 20,535,850 | $ | 18,217,396 | ||||
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|||||
NET ASSETS |
||||||||
Common shares, par value $.001 per share, 250,000,000 common shares authorized, 3,874,385 and 2,300,573 common shares issued and outstanding, respectively |
$ | 3,874 | $ | 2,301 | ||||
Capital in excess of par value |
34,644,126 | 20,436,709 | ||||||
Accumulated undistributed net investment income |
203,132 | 203,132 | ||||||
Net unrealized appreciation/(depreciation) on investments |
727,159 | (19,160 | ) | |||||
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|
|
|||||
Total net assets |
35,578,291 | 20,622,982 | ||||||
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|
|||||
Total liabilities and net assets |
$ | 56,114,141 | $ | 38,840,378 | ||||
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|||||
NET ASSET VALUE PER SHARE |
$ | 9.18 | $ | 8.96 | ||||
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|
|
See accompanying notes to the financial statements.
F-1
Table of Contents
Statements of Operations
For the three months ended March 31 | ||||||||
2013 | 2012 | |||||||
(unaudited) | (unaudited) | |||||||
INVESTMENT INCOME |
||||||||
Interest from Non-Controlled/Non-Affiliated investments |
$ | 993,105 | $ | | ||||
Other fee income |
64,710 | |||||||
Interest from cash and cash equivalents |
262 | | ||||||
|
|
|
|
|||||
Total investment income |
1,058,077 | | ||||||
EXPENSES |
||||||||
Professional fees |
295,276 | | ||||||
Base management fee |
245,499 | | ||||||
Organizational and offering costs reimbursed to an affiliate (Note 6) |
178,167 | 125,000 | ||||||
Provisional incentive fee |
148,636 | | ||||||
Administrator expenses |
138,090 | | ||||||
General and administrative expenses |
131,170 | | ||||||
Directors fees |
43,765 | | ||||||
Interest and financing expenses |
28,645 | | ||||||
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|
|||||
Total gross expenses |
1,209,248 | 125,000 | ||||||
Expense support payment (Note 6) |
(685,404 | ) | | |||||
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|
|||||
Net expenses |
523,844 | 125,000 | ||||||
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|||||
NET INVESTMENT INCOME/(LOSS) |
534,233 | (125,000 | ) | |||||
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|||||
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: |
||||||||
Net realized gain/(loss) from investments |
110,635 | | ||||||
Net change in unrealized appreciation/(depreciation) on investments |
746,319 | | ||||||
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|
|||||
Net gain/(loss) on investments |
856,954 | | ||||||
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|
|||||
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 1,391,187 | $ | (125,000 | ) | |||
|
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|
|||||
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE |
$ | 0.43 | $ | (1,128.13 | ) | |||
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE |
$ | 0.17 | $ | (1,128.13 | ) | |||
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED |
3,226,281.1 | 110.8 | ||||||
DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.20 | $ | |
See accompanying notes to the financial statements.
F-2
Table of Contents
Statements of Changes in Net Assets
For the three months ended March 31 | ||||||||
2013 | 2012 | |||||||
(unaudited) | (unaudited) | |||||||
INCREASE FROM OPERATIONS |
||||||||
Net investment income/(loss) |
$ | 534,233 | $ | (125,000 | ) | |||
Net realized gain/(loss) on investments |
110,635 | | ||||||
Net change in unrealized appreciation/(depreciation) on investments |
746,319 | | ||||||
|
|
|
|
|||||
Net increase/(decrease) in net assets resulting from operations |
1,391,187 | (125,000 | ) | |||||
|
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|
|||||
SHAREHOLDER DISTRIBUTIONS |
||||||||
Distributions from realized gains |
(110,635 | ) | | |||||
Distributions from net investment income |
(534,233 | ) | | |||||
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|
|||||
Net decrease in net assets from shareholder distributions |
(644,868 | ) | | |||||
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CAPITAL SHARE TRANSACTIONS |
||||||||
Issuance of common shares, net of underwriting costs |
14,056,126 | | ||||||
Issuance of common shares pursuant to distribution reinvestment plan |
152,864 | | ||||||
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|
|||||
Net increase in net assets from capital share transactions |
14,208,990 | | ||||||
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|
|||||
Total increase in net assets |
13,564,122 | | ||||||
Net assets at beginning of period |
20,622,982 | 1,000 | ||||||
|
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|
|
|||||
Net assets at end of period (including accumulated net investment income/loss of $203,132 and ($125,000), respectively) |
$ | 35,578,291 | $ | (124,000 | ) | |||
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|
|||||
Net asset value per common share |
$ | 9.18 | $ | (1,119.13 | ) | |||
Common shares outstanding, beginning of period |
2,300,573 | 110.8 | ||||||
Issuance of common shares |
1,556,962 | | ||||||
Issuance of common shares pursuant to distribution reinvestment plan |
16,850 | | ||||||
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|
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Common shares outstanding, end of period |
3,874,385 | 110.8 | ||||||
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|
|
See accompanying notes to the financial statements.
F-3
Table of Contents
Statements of Cash Flows
For the three months ended March 31 | ||||||||
2013 | 2012 | |||||||
(unaudited) | (unaudited) | |||||||
Cash flows from operating activities |
||||||||
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 1,391,187 | $ | (125,000 | ) | |||
ADJUSTMENT TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES |
||||||||
Paid-in-kind interest income |
(580 | ) | | |||||
Net amortization of premium on investments |
(522 | ) | | |||||
Net realized (gain)/loss on investments |
(110,635 | ) | | |||||
Net change in unrealized (appreciation)/depreciation on investments |
(746,319 | ) | | |||||
Purchases of investments |
(22,293,965 | ) | | |||||
Proceeds from sale of investments |
4,137,935 | | ||||||
(Increase)/decrease in operating assets: |
||||||||
Interest receivable |
(308,593 | ) | | |||||
Unsettled trade receivable |
(503,750 | ) | | |||||
Prepaid expenses and other assets |
(32,099 | ) | | |||||
Due from affiliate |
(182,281 | ) | | |||||
Increase/(decrease) in operating liabilities: |
||||||||
Unsettled trades |
6,585,675 | | ||||||
Management fee |
74,182 | | ||||||
Interest |
183 | | ||||||
Accounts payable and accrued expenses |
192,076 | | ||||||
Administrator services fees |
9,631 | | ||||||
Due to affiliate |
(15,237 | ) | 125,000 | |||||
Provisional incentive fee payable |
148,635 | | ||||||
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|
|
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NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES |
(11,654,477 | ) | | |||||
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|
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Cash Flows from Financing Activities |
||||||||
Borrowings under prime broker margin account |
(4,676,691 | ) | | |||||
Proceeds from issuance of common stock, net of underwriting costs |
14,056,126 | | ||||||
Payment of cash dividends |
(492,004 | ) | | |||||
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|
|||||
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES |
8,887,431 | | ||||||
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|
|||||
TOTAL INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
(2,767,046 | ) | | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
6,651,767 | 1,000 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 3,884,721 | $ | 1,000 | ||||
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Supplemental Information |
||||||||
Cash paid during the period for interest |
$ | 28,645 | $ | | ||||
Supplemental non-cash information |
||||||||
Paid-in-kind interest income |
$ | 580 | $ | | ||||
Net amortization of premium on investments |
$ | 522 | $ | | ||||
Issuance of common shares in connection with distribution reinvestment plan |
$ | 152,864 | $ | |
See accompanying notes to the financial statements.
F-4
Table of Contents
Schedule of Investments
As of March 31, 2013
(unaudited)
Portfolio Company (1) |
Industry | Interest | Maturity | Principal Amount |
Amortized Cost |
Fair Value | % of Net Assets (3) | |||||||||||||||
Non-Controlled/Non-Affiliated investments 130.8%(3) |
||||||||||||||||||||||
Senior Secured Notes 87.5%(3)(5) |
||||||||||||||||||||||
American Apparel, Inc. (2)(4) |
Retail Stores | 13.000% | 4/15/2020 | $ | 2,000,000 | $ | 1,940,000 | $ | 1,940,000 | 5.5% | ||||||||||||
Associated Asphalt Partners, LLC(4) |
Business Services | 8.500% | 2/15/2018 | 1,000,000 | 1,000,000 | 1,022,496 | 2.9% | |||||||||||||||
Atkore International, Inc. (2) |
Mining, Steel, Iron, and Nonprecious Metals |
9.875% | 1/1/2018 | 750,000 | 733,768 | 825,000 | 2.3% | |||||||||||||||
Bon-Ton Stores, Inc. |
Retail Stores | 10.625% | 7/15/2017 | 1,750,000 | 1,659,221 | 1,754,375 | 4.9% | |||||||||||||||
Cengage Learning, Inc.(4) |
Healthcare, Education, and Childcare |
11.500% | 4/15/2020 | 1,250,000 | 1,345,783 | 937,500 | 2.6% | |||||||||||||||
Checkers Drive-In Restaurants, Inc. (4) |
Restaurant & Franchise |
11.000% | 12/1/2017 | 1,500,000 | 1,504,766 | 1,571,250 | 4.4% | |||||||||||||||
Cornerstone Chemical Company(4) |
Chemicals | 9.375% | 3/15/2018 | 2,000,000 | 2,000,000 | 2,040,000 | 5.7% | |||||||||||||||
Dispensing Dynamics International, Inc.(2) (4) |
Personal and Nondurable Consumer Products (Manufacturing Only) |
12.500% | 1/1/2018 | 1,200,000 | 1,176,858 | 1,242,000 | 3.5% | |||||||||||||||
EarthLink, Inc. |
Telecommunications | 10.500% | 4/1/2016 | 900,000 | 947,217 | 951,750 | 2.7% | |||||||||||||||
Exide Technologies(2) (4) |
Machinery (Nonagriculture, Nonconstruction, Nonelectric) |
8.625% | 2/1/2018 | 1,600,000 | 1,346,066 | 1,368,000 | 3.8% | |||||||||||||||
Fifth and Pacific Companies, Inc. (4) |
Retail Stores | 10.500% | 4/15/2019 | 500,000 | 555,353 | 562,500 | 1.6% | |||||||||||||||
Green Field Energy Services, Inc. (2) (4) |
Oil and Gas | 13.000% | 11/15/2016 | 724,000 | 714,300 | 774,680 | 2.2% | |||||||||||||||
IDQ Holdings, Inc. (4) |
Automobile | 11.500% | 4/1/2017 | 1,000,000 | 1,042,387 | 1,095,000 | 3.1% | |||||||||||||||
Ineos Finance PLC(4) |
Chemicals | 7.500% | 5/1/2020 | 1,250,000 | 1,284,262 | 1,359,375 | 3.8% | |||||||||||||||
Innovation Ventures, Inc. (4) |
Retail | 9.500% | 8/15/2019 | 1,250,000 | 1,225,390 | 1,053,125 | 3.0% | |||||||||||||||
Interface Security Systems, Inc. (2) (4) |
Business Services | 9.250% | 1/15/2018 | 1,917,000 | 1,935,126 | 1,979,303 | 5.6% | |||||||||||||||
Linc Energy Finance (USA), Inc.(2) (4) |
Oil and Gas | 12.500% | 10/31/2017 | 1,000,000 | 981,431 | 1,092,500 | 3.1% | |||||||||||||||
Maxim Crane Works Holdings, Inc. (4) |
Industrial | 12.250% | 4/15/2015 | 1,000,000 | 1,009,081 | 1,040,000 | 2.9% | |||||||||||||||
Mohegan Tribal Gaming Authority(4) |
Gaming | 11.500% | 11/1/2017 | 1,000,000 | 1,043,505 | 1,085,000 | 3.0% | |||||||||||||||
Pittsburgh Glass Works, LLC(4) |
Automobile | 8.500% | 4/15/2016 | 1,425,000 | 1,331,975 | 1,439,250 | 4.0% | |||||||||||||||
Prince Minerals Holding Corp.(2) (4) |
Mining, Steel, Iron, and Nonprecious Metals |
11.500% | 12/15/2019 | 1,200,000 | 1,186,330 | 1,338,000 | 3.8% | |||||||||||||||
Satmex Mexicanos, S.A. de C.V. (4) |
Telecommunications | 9.500% | 5/15/2017 | 1,000,000 | 1,033,895 | 1,062,500 | 3.0% | |||||||||||||||
Shale-Inland Holdings, Inc. (4) |
Energy | 8.750% | 11/15/2019 | 1,000,000 | 993,793 | 1,025,911 | 2.9% | |||||||||||||||
Sizzling Platter, LLC(2) (4) |
Restaurant & Franchise |
12.250% | 4/15/2016 | 2,063,000 | 2,142,397 | 2,147,283 | 6.0% | |||||||||||||||
Tempel Steel Company(2) (4) |
Mining, Steel, Iron, and Nonprecious Metals |
12.000% | 8/15/2016 | 1,115,000 | 1,103,642 | 1,047,674 | 2.9% | |||||||||||||||
Tower International, Inc.(2) (4) |
Automobile | 10.625% | 9/1/2017 | 500,000 | 517,284 | 555,000 | 1.6% | |||||||||||||||
U.S. Well Services, LLC(2) (4) |
Oil and Gas | 14.500% | 2/15/2017 | 1,816,605 | 1,804,304 | 1,821,737 | 5.1% | |||||||||||||||
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Total Senior Secured Notes |
$ | 33,710,605 | $ | 33,558,133 | $ | 34,131,209 | ||||||||||||||||
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|
|||||||||||||||||
Senior Secured First Lien Term Loans 11.0%(3) |
||||||||||||||||||||||
Alcatel Lucent USA, Inc. |
Communications | LIBOR + 6.000%, 1.250% Floor |
1/30/2019 | 1,000,000 | 995,106 | 1,012,500 | 2.8% | |||||||||||||||
Great Atlantic & Pacific Tea Company(2) |
Grocery | LIBOR + 9.000%, 2.000% Floor |
3/13/2017 | 940,500 | 961,082 | 937,616 | 2.6% | |||||||||||||||
Sorenson Communications |
Communications | LIBOR + 8.250%, 1.250% Floor |
10/15/2014 | 2,000,000 | 2,000,000 | 2,000,000 | 5.6% | |||||||||||||||
|
|
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|
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Total Senior Secured First Lien Term Loans |
$ | 3,940,500 | $ | 3,956,188 | $ | 3,950,116 | ||||||||||||||||
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|
|||||||||||||||||
Senior Secured Second Lien Term Loans - 32.2%(3) |
||||||||||||||||||||||
Aderant North America, Inc.(2) |
Electronics | LIBOR + 8.750%, 1.250% Floor |
6/20/2019 | 450,000 | 450,000 | 450,000 | 1.3% | |||||||||||||||
ALG USA Holdings, Inc. |
Travel and Entertainment |
LIBOR + 9.000%, 1.250% Floor |
2/28/2020 | 2,000,000 | 1,960,150 | 1,960,001 | 5.5% | |||||||||||||||
Camp Systems International, Inc. |
Aerospace & Defense | LIBOR + 8.750%, 1.250% Floor |
11/30/2019 | 500,000 | 490,756 | 510,000 | 1.4% | |||||||||||||||
Deltek, Inc. |
Software | LIBOR + 8.750%, 1.250% Floor |
10/10/2019 | 1,000,000 | 985,724 | 1,008,661 | 2.8% | |||||||||||||||
Healogics, Inc. |
Healthcare, Education, and Childcare |
LIBOR + 8.000%, 1.250% Floor |
2/5/2020 | 1,500,000 | 1,485,224 | 1,530,000 | 4.3% | |||||||||||||||
Integra Telecom, Inc. (2) |
Telecommunications | LIBOR + 8.500%, 1.250% Floor |
2/15/2020 | 1,618,000 | 1,621,675 | 1,658,450 | 4.7% |
F-5
Table of Contents
Portfolio Company (1) |
Industry | Interest | Maturity | Principal Amount |
Amortized Cost |
Fair Value | % of Net Assets (3) | |||||||||||||||
Reddy Ice Group, Inc. (2) |
Personal and Nondurable Consumer Products (Manufacturing Only) |
LIBOR + 9.500%, 1.250% Floor |
10/1/2019 | 2,000,000 | 2,000,000 | 1,960,000 | 5.5% | |||||||||||||||
Securus Technologies, Inc. (2) |
Telecommunications | LIBOR + 9.000%, 1.750% Floor |
5/31/2018 | 1,350,000 | 1,349,415 | 1,383,750 | 3.9% | |||||||||||||||
Sesac Holdco II, Inc. (2) |
Business Services | LIBOR + 9.000%, 1.250% Floor |
7/12/2019 | 500,000 | 492,595 | 511,250 | 1.4% | |||||||||||||||
Travelport LLC |
Business Services | LIBOR + 9.500%, 1.500% Floor |
11/22/2015 | 500,000 | 488,104 | 512,500 | 1.4% | |||||||||||||||
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|||||||||||||||||
Total Senior Secured Second Lien Term Loans |
$ | 11,418,000 | $ | 11,323,643 | $ | 11,484,612 | ||||||||||||||||
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|||||||||||||||||
Portfolio Company |
Industry | Principal Amount |
Amortized Cost |
Fair Value | % of Net Assets) (3) | |||||||||||||||||
Warrants/Equity - 0.1%(3) |
||||||||||||||||||||||
Green Field Energy Services, Inc., Warrants(2) |
Oil & Gas | 709 | 29,000 | 28,360 | 0.1% | |||||||||||||||||
U.S. Well Services, LLC (2) |
Oil & Gas | 1,731 | 173 | | 0.0% | |||||||||||||||||
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|||||||||||||||||
Total Warrants/Equity |
2,440 | $ | 29,173 | $ | 28,360 | |||||||||||||||||
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|||||||||||||||||
Total Non-controlled/ non-affiliated investments |
$ | 49,071,545 | 48,867,138 | 49,594,297 | ||||||||||||||||||
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|
|
(1) | All of our investments are domiciled in the United States except for Satmex Mexicanos S.A. de C.V., which is domiciled in Mexico. |
(2) | An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security. |
(3) | Percentage is based on net assets of $35,578,291 as of March 31, 2013. |
(4) | Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $30,600,084 and 86.0% of net assets as of March 31, 2013 and are considered restricted. |
(5) | Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at March 31, 2013 is $34,131,209. |
F-6
Table of Contents
Sierra Income Corporation
As of December 31, 2012
(audited)
Portfolio Company |
Industry | Interest | Maturity | Principal Amount |
Amortized Cost |
Fair Value | % of Net Assets (3) | |||||||||||||||
Non-Controlled/Non-Affiliated investments 148.3%(3) |
||||||||||||||||||||||
Senior Secured Notes 124.6%(3)(5) |
||||||||||||||||||||||
Atkore International, Inc. (2) |
Mining, Steel, Iron, and Nonprecious Metals |
9.875% | 1/1/2018 | $ | 750,000 | $ | 733,129 | $ | 801,600 | 3.9% | ||||||||||||
Bon-Ton Stores, Inc. |
Retail Stores | 10.625% | 7/15/2017 | 1,000,000 | 914,795 | 951,200 | 4.6% | |||||||||||||||
Cengage Learning, Inc. |
Healthcare, Education, and Childcare |
11.500% | 4/15/2020 | 1,250,000 | 1,348,108 | 1,062,500 | 5.2% | |||||||||||||||
Checkers Drive-In Restaurants, Inc. |
Restaurant & Franchise |
11.000% | 12/1/2017 | 1,500,000 | 1,504,956 | 1,504,956 | 7.3% | |||||||||||||||
Dispensing Dynamics International, Inc.(2) |
Personal and Nondurable Consumer Products (Manufacturing Only) |
12.500% | 1/1/2018 | 1,200,000 | 1,176,009 | 1,176,009 | 5.7% | |||||||||||||||
EarthLink, Inc. |
Telecommunications | 10.500% | 4/1/2016 | 900,000 | 950,574 | 957,420 | 4.6% | |||||||||||||||
Exide Technologies(2) |
Machinery (Nonagriculture, Nonconstruction, Nonelectric) |
8.625% | 2/1/2018 | 1,600,000 | 1,336,979 | 1,364,001 | 6.6% | |||||||||||||||
Fifth and Pacific Companies, Inc. |
Retail Stores | 10.500% | 4/15/2019 | 500,000 | 557,130 | 557,130 | 2.7% | |||||||||||||||
Green Field Energy Services, Inc. |
Oil and Gas | 13.000% | 11/15/2016 | 512,000 | 494,791 | 494,791 | 2.4% | |||||||||||||||
IDQ Holdings, Inc. |
Automobile | 11.500% | 4/1/2017 | 1,000,000 | 1,044,468 | 1,078,200 | 5.2% | |||||||||||||||
Ineos Finance PLC. |
Chemicals | 7.500% | 5/1/2020 | 1,250,000 | 1,285,207 | 1,285,207 | 6.2% | |||||||||||||||
Innovation Ventures, Inc. |
Retail | 9.500% | 8/1/2019 | 1,250,000 | 1,224,724 | 1,179,375 | 5.7% | |||||||||||||||
Integra Telecom, Inc.(2) |
Telecommunications | 10.750% | 4/15/2016 | 750,000 | 722,600 | 757,500 | 3.7% | |||||||||||||||
Linc Energy Finance (USA), Inc.(2) |
Oil and Gas | 12.500% | 10/31/2017 | 1,000,000 | 980,715 | 980,715 | 4.8% | |||||||||||||||
Maxim Crane Works Holdings, Inc. |
Industrial | 12.250% | 4/15/2015 | 1,000,000 | 1,010,037 | 1,029,400 | 5.0% | |||||||||||||||
Mohegan Tribal Gaming Authority |
Gaming | 11.500% | 11/1/2017 | 1,000,000 | 1,045,312 | 1,045,312 | 5.1% | |||||||||||||||
Pittsburgh Glass Works, LLC |
Automobile | 8.500% | 4/15/2016 | 1,425,000 | 1,325,728 | 1,311,000 | 6.4% | |||||||||||||||
Prince Minerals Holding Corp.(2) |
Mining, Steel, Iron, and Nonprecious Metals |
11.500% | 12/15/2019 | 1,200,000 | 1,186,001 | 1,248,000 | 6.1% | |||||||||||||||
Satmex Mexicanos, S.A. de C.V. |
Telecommunications | 9.500% | 5/15/2017 | 1,000,000 | 1,035,564 | 1,035,564 | 5.0% | |||||||||||||||
Shale-Inland Holdings, Inc. |
Energy | 8.750% | 11/15/2019 | 1,000,000 | 993,624 | 1,010,000 | 4.9% | |||||||||||||||
Sizzling Platter, LLC(2) |
Restaurant & Franchise |
12.250% | 4/15/2016 | 1,652,000 | 1,715,987 | 1,715,987 | 8.3% | |||||||||||||||
Tempel Steel Company(2) |
Mining, Steel, Iron, and Nonprecious Metals |
12.000% | 8/15/2016 | 1,115,000 | 1,102,986 | 1,090,024 | 5.3% | |||||||||||||||
Tower International, Inc.(2) |
Automobile | 10.625% | 9/1/2017 | 500,000 | 518,324 | 534,500 | 2.6% | |||||||||||||||
U.S. Well Services, LLC(2) |
Oil and Gas | 14.500% | 2/15/2017 | 1,518,405 | 1,504,921 | 1,503,828 | 7.3% | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total Senior Secured Notes |
$ | 25,872,405 | $ | 25,712,669 | $ | 25,674,219 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Senior Secured First Lien Term Loans 9.5%(3) |
||||||||||||||||||||||
Great Atlantic & Pacific Tea Company(2) |
Grocery | LIBOR + 9%, 2% Floor |
3/13/2017 | 942,875 | 964,535 | 964,535 | 4.7% | |||||||||||||||
WeLocalize, Inc.(2) |
Business Services | LIBOR + 8%, 2% Floor |
11/19/2015 | 459,478 | 459,478 | 459,478 | 2.2% | |||||||||||||||
WeLocalize, Inc.(2) |
Business Services | LIBOR + 9%, 2% Floor, 1.25% PIK |
11/19/2015 | 538,617 | 538,617 | 538,617 | 2.6% | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total Senior Secured First Lien Term Loans |
$ | 1,940,970 | $ | 1,962,630 | $ | 1,962,630 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Senior Secured Second Lien Term Loans 14.2%(3) |
||||||||||||||||||||||
Aderant North America, Inc.(2) |
Electronics | LIBOR + 8.75%, 1.25% Floor |
6/20/2019 | 450,000 | 450,000 | 450,000 | 2.2% | |||||||||||||||
Camp Systems International, Inc. |
Aerospace & Defense | LIBOR + 8.75%, 1.25% Floor |
11/30/2019 | 500,000 | 490,523 | 505,000 | 2.4% | |||||||||||||||
Deltek, Inc(2). |
Software | LIBOR + 8.75%, 1.25% Floor |
10/31/2019 | 1,000,000 | 985,343 | 985,343 | 4.8% | |||||||||||||||
Securus Technologies, Inc. |
Communications | LIBOR + 9.00%, 1.75% Floor |
5/31/2018 | 500,000 | 490,854 | 490,854 | 2.4% | |||||||||||||||
Travelport LLC |
Business Services | LIBOR + 9.5%, 1.5% Floor |
11/22/2015 | 500,000 | 487,178 | 497,050 | 2.4% | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total Senior Secured Second Lien Term Loans |
$ | 2,950,000 | $ | 2,903,898 | $ | 2,928,247 | ||||||||||||||||
|
|
|
|
|
|
F-7
Table of Contents
Portfolio Company |
Industry | Interest | Maturity | Principal Amount |
Amortized Cost |
Fair Value | %
of Net Assets(3) | |||||||||||||||||||||||||||||
Warrants/Equity - 0.1%(3) |
||||||||||||||||||||||||||||||||||||
Green Field Energy Services, Inc., Warrants |
Oil & Gas | 20,000 | 20,000 | 15,115 | 0.1 | % | ||||||||||||||||||||||||||||||
U.S. Well Services, LLC (2) |
Oil & Gas | 1,518 | 152 | 0 | 0.0 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Total Warrants/Equity |
$ | 21,518 | $ | 20,152 | $ | 15,115 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total Non-controlled/ non-affiliated investments |
$ | 30,599,349 | $ | 30,580,211 | ||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
US Government Treasuries 29.1%(3) |
||||||||||||||||||||||||||||||||||||
US Treasury Bill |
US Government Treasuries |
1.375 | % | 1/15/2013 | 6,000,000 | 6,003,022 | 6,003,000 | 29.1 | % | |||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Total Investments and US Government Treasuries 177.4%(3) |
$ | 36,765,393 | $ | 36,602,371 | $ | 36,583,211 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
(1) | All of our investments are domiciled in the United States except for Satmex Mexicanos S.A. de C.V., which is domiciled in Mexico. |
(2) | An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security. |
(3) | Percentage is based on net assets of $20,622,982 as of December 31, 2012. |
(4) | Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $25,674,219 and 124.6% of net assets as of December 31, 2012 and are considered restricted. |
(5) | Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at December 31, 2012 is $25,674,219. |
F-8
Table of Contents
Notes to Financial Statements
March 31, 2013
(unaudited)
Note 1. Organization
Sierra Income Corporation (the Company) was incorporated under the general corporation laws of the State of Maryland on June 13, 2011 and formally commenced operations on April 17, 2012. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). The Company is externally managed by SIC Advisors LLC (SIC Advisors), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act). The Company intends to elect and qualify to be treated for U.S. federal income tax purposes as a regulated investment company (RIC) under subchapter M of the Internal Revenue Code of 1986, as amended (the Code), commencing with its taxable year ended December 31, 2012, and intends to so qualify annually thereafter. The Companys fiscal year-end is December 31st.
On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. The Companys offering period is currently scheduled to terminate two years after the initial offering date, or April 16, 2014, unless extended. Since commencing its operations, the Company has sold a total of 3,874,385 shares of common stock for total proceeds of $37,939,662, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Companys statements of changes in net assets and statements of cash flows and are presented net of selling commissions and dealer manager fees.
The Companys investment objective is to generate net investment income, and to a lesser extent, long-term capital appreciation. The Company intends to meet its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. The Company will originate transactions sourced through SIC Advisors direct origination network, and also expects to acquire debt securities through the secondary market. The Company may make equity investments in companies that it believes will generate appropriate risk adjusted returns, although it does not expect this to be a substantial portion of the portfolio.
Note 2. Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (GAAP). Additionally, the accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The current periods results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2013.
As the Company commenced operations on April 17, 2012, there is no activity in the comparable period for the quarter ended March 31, 2012.
Cash and Cash Equivalents
The Company considers cash equivalents to be highly liquid investments or investments with original maturities of three months or less. Cash and cash equivalents include deposits in a money market account. The Company deposits its cash in a financial institution which, at times, may be in excess of the Federal Deposit Insurance Corporation insurance limits.
Offering Costs
Offering costs incurred directly by the Company will be expensed in the period incurred. See Note 6 regarding offering costs paid for by SIC Advisors.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-9
Table of Contents
Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Companys individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on managements experience, the Company expects the risk of loss to be remote.
Revenue Recognition
Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. We record amortized or accreted discounts or premiums as interest income using the effective interest method. Dividend income, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.
Origination, amendment, closing and/or commitment fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the quarter ended March 31, 2013 was $64,710.
Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.
The Company holds debt investments in its portfolio that contain a payment-in-kind (PIK) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the quarter ended March 31, 2013 the Company earned $580 in PIK interest.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the statements of operations.
Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon managements judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in managements judgment, are likely to remain current, although the Company may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, it would be deemed to control a portfolio company if it owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it controls as Control Investments. Under the 1940 Act, the Company would be deemed to be an Affiliated Person of a portfolio company if it owns between 5% and 25% of the portfolio companys outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as Affiliated Investments. As of March 31, 2013, the Company has no Controlled Investments or Affiliated Investments.
F-10
Table of Contents
Valuation of Investments
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Companys own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Companys board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.
The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on information obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Companys loans is determined based upon inputs such as the coupon rate, current market discount yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrowers capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio companys assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.
The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
| the Companys quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment; |
| preliminary valuation conclusions are then documented and discussed with senior management; and |
| an independent valuation firm engaged by the Companys board of directors reviews approximately one third of these preliminary valuations each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by independent valuation firms at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms. |
In addition, all of the Companys investments are subject to the following valuation process:
| management reviews preliminary valuations and their own independent assessment; |
| the audit committee of the Companys board of directors reviews the preliminary valuations of senior management and independent valuation firms; and |
| the Companys board of directors discusses valuations and determines the fair value of each investment in the Companys portfolio in good faith based on the input of SIC Advisors, the respective independent valuation firms and the audit committee. |
F-11
Table of Contents
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
Fair Value of Financial Instruments
The carrying amounts of certain of the Companys financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature.
Federal Income Taxes
The Company intends to elect to be treated as a RIC under subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements. Once qualified as a RIC, the Company must timely distribute to its stockholders at least 90% of the sum of its investment company taxable income including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of the Companys gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. Any such carryover taxable income must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such taxable income.
The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.
The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (ASC 740). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The 2011 and 2012 federal tax years for the Company remain subject to examination by the Internal Revenue Service.
Taxable income generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize taxable income in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in taxable income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in taxable income other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in taxable income. Because any original issue discount or other amounts accrued will be included in the Companys taxable income for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. Taxable income also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
Segments
The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Companys financial statements. See Note 3 for further information.
F-12
Table of Contents
Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk
SIC Advisors has broad discretion in making investments for the Company. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Companys activities and the value of its investments. In addition, the value of the Companys portfolio may fluctuate as the general level of interest rates fluctuates.
The value of the Companys investments in loans and bonds may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Companys borrowers, and those for which market yields are observable increase materially. SIC Advisors may attempt to minimize this risk by maintaining low loan-to-liquidation values with each loan and the collateral underlying the loan.
The Companys assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Note 3. Investments
The following table shows the portfolio composition by industry classification at fair value at March 31, 2013:
Fair Value | Percentage | |||||||
Telecommunications |
5,056,450 | 10.1 | % | |||||
Retail Stores |
4,256,875 | 8.5 | % | |||||
Business Services |
4,025,549 | 8.1 | % | |||||
Restaurant & Franchise |
3,718,533 | 7.5 | % | |||||
Oil and Gas |
3,717,277 | 7.5 | % | |||||
Chemicals |
3,399,375 | 6.9 | % | |||||
Mining, Steel, Iron, and Nonprecious metals |
3,210,674 | 6.5 | % | |||||
Personal and Nondurable Consumer Products (Manufacturing Only) |
3,202,000 | 6.5 | % | |||||
Automobile |
3,089,250 | 6.2 | % | |||||
Communications |
3,012,500 | 6.1 | % | |||||
Healthcare, Education, and Childcare |
2,467,500 | 5.0 | % | |||||
Travel & Entertainment |
1,960,001 | 4.0 | % | |||||
Machinery (Nonagriculture, Nonconstruction, Nonelectric) |
1,368,000 | 2.8 | % | |||||
Gaming |
1,085,000 | 2.2 | % | |||||
Retail |
1,053,125 | 2.1 | % | |||||
Industrial |
1,040,000 | 2.1 | % | |||||
Energy |
1,025,911 | 2.1 | % | |||||
Software |
1,008,661 | 2.0 | % | |||||
Grocery |
937,616 | 1.9 | % | |||||
Aerospace & Defense |
510,000 | 1.0 | % | |||||
Electronics |
450,000 | 0.9 | % | |||||
|
|
|
|
|||||
Total |
$ | 49,594,297 | 100.0 | % | ||||
|
|
|
|
The following table shows the portfolio composition by industry classification at fair value at December 31, 2012:
Fair Value | Percentage | |||||||
Telecommunications |
3,241,338 | 10.5 | % | |||||
Restaurant & Franchise |
3,220,943 | 10.4 | % | |||||
Mining, Steel, Iron, and Nonprecious metals |
3,139,624 | 10.3 | % | |||||
Oil and Gas |
2,994,449 | 9.8 | % | |||||
Automobile |
2,923,700 | 9.6 | % | |||||
Retail Stores |
1,508,330 | 4.9 | % | |||||
Business Services |
1,495,145 | 4.9 | % | |||||
Machinery (Nonagriculture, Nonconstruction, Nonelectric) |
1,364,001 | 4.5 | % | |||||
Chemicals |
1,285,207 | 4.2 | % |
F-13
Table of Contents
Fair Value | Percentage | |||||||
Retail |
1,179,375 | 3.9 | % | |||||
Personal and Nondurable Consumer Products (Manufacturing Only) |
1,176,009 | 3.8 | % | |||||
Healthcare, Education, and Childcare |
1,062,500 | 3.5 | % | |||||
Gaming |
1,045,312 | 3.4 | % | |||||
Industrial |
1,029,400 | 3.4 | % | |||||
Energy |
1,010,000 | 3.3 | % | |||||
Software |
985,343 | 3.2 | % | |||||
Grocery |
964,535 | 3.2 | % | |||||
Aerospace & Defense |
505,000 | 1.7 | % | |||||
Electronics |
450,000 | 1.5 | % | |||||
|
|
|
|
|||||
Total |
$ | 30,580,211 | 100.0 | % | ||||
|
|
|
|
The following table summarizes the amortized cost and the fair value of investments as of March 31, 2013:
Amortized Cost |
Percentage | Fair Value | Percentage | |||||||||||||
Senior secured first lien term loan |
$ | 3,956,188 | 8.1 | % | $ | 3,950,116 | 8.0 | % | ||||||||
Senior secured second lien term loan |
11,323,643 | 23.2 | 11,484,612 | 23.2 | ||||||||||||
Senior secured notes |
33,558,134 | 68.6 | 34,131,209 | 68.7 | ||||||||||||
Warrants |
29,173 | 0.1 | 28,360 | 0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 48,867,138 | 100.0 | % | $ | 49,594,297 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
The following table summarizes the amortized cost and the fair value of investments as of December 31, 2012:
Amortized Cost |
Percentage | Fair Value | Percentage of Total |
|||||||||||||
Senior secured first lien term loan |
$ | 1,962,630 | 6.4 | % | $ | 1,962,630 | 6.4 | % | ||||||||
Senior secured second lien term loan |
2,903,898 | 9.5 | 2,928,247 | 9.6 | ||||||||||||
Senior secured notes |
25,712,669 | 84.0 | 25,674,219 | 84.0 | ||||||||||||
Warrants |
20,152 | 0.1 | 15,115 | 0.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 30,559,349 | 100.0 | % | $ | 30,580,211 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geography classification at fair value at March 31, 2013:
Geography |
Fair Value | Percentage | ||||||
United States |
$ | 48,531,797 | 97.9 | % | ||||
Mexico |
1,062,500 | 2.1 | ||||||
|
|
|
|
|||||
Total |
$ | 49,594,297 | 100.0 | % | ||||
|
|
|
|
The following table shows the portfolio composition by geography classification at fair value at December 31, 2012:
Geography |
Fair Value | Percentage | ||||||
United States |
$ | 29,544,647 | 96.6 | % | ||||
Mexico |
1,035,564 | 3.4 | ||||||
|
|
|
|
|||||
Total |
$ | 30,580,211 | 100.0 | % | ||||
|
|
|
|
F-14
Table of Contents
Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for us and other clients, or affiliated funds. As a BDC, the Company is substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds unless it obtains an exemptive order from the SEC. The Company has applied for such an exemptive order, although there is no assurance that it will obtain the requested relief. Before receiving relief, the Company will only participate in co-investments that are allowed under existing regulatory guidance, such as syndicated loan transactions where price is the only negotiated term, which could limit the types of investments that the Company may make. Please refer to footnote 2 to the Schedule of Investments as of March 31, 2013 for disclosures regarding securities also held by affiliated funds.
Note 4. Fair Value Measurements
The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments complexity. The Companys fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:
| Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date. |
| Level 2 - Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities. |
| Level 3 - Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and is based upon managements assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. |
In addition to using the above inputs in investment valuations, the Company employs the valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with the Companys valuation policy, the Company evaluates the source of inputs, including any markets in which the Companys investments are trading, in determining fair value.
The following table presents the fair value measurements of the Companys investments, by major class according to the fair value hierarchy, as of March 31, 2013:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior secured first lien term loans |
$ | | $ | | $ | 3,950,116 | $ | 3,950,116 | ||||||||
Senior secured second lien term loans |
| | 11,484,612 | 11,484,612 | ||||||||||||
Senior secured notes |
| 5,461,625 | 28,669,584 | 34,131,209 | ||||||||||||
Warrants/Equity |
| | 28,360 | 28,360 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 5,461,625 | $ | 44,132,672 | $ | 49,594,297 | ||||||||
|
|
|
|
|
|
|
|
F-15
Table of Contents
The following table presents the fair value measurements of the Companys investments, by major class according to the fair value hierarchy, as of December 31, 2012:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior secured first lien term loans |
$ | | $ | | $ | 1,962,630 | $ | 1,962,630 | ||||||||
Senior secured second lien term loans |
| | 2,928,247 | 2,928,247 | ||||||||||||
Senior secured notes |
| 3,123,021 | 22,551,198 | 25,674,219 | ||||||||||||
Warrants/Equity |
| | 15,115 | 15,115 | ||||||||||||
US Government Treasuries |
| 6,003,000 | | 6,003,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 9,126,021 | $ | 27,457,190 | $ | 36,583,211 | ||||||||
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the quarter ended March 31, 2013:
Senior Secured Notes |
Senior Secured First Lien Term Loans |
Senior Secured Second Lien Term Loans |
Warrants/ Equity |
Total | ||||||||||||||||
Balance, December 31, 2012 |
$ | 22,551,198 | $ | 1,962,630 | $ | 2,928,247 | $ | 15,115 | $ | 27,457,190 | ||||||||||
Purchases |
9,652,029 | 3,490,000 | 8,417,675 | 9,021 | 21,568,725 | |||||||||||||||
Sales |
(2,633,135 | ) | (1,504,800 | ) | | | (4,137,935 | ) | ||||||||||||
Transfers in (out) |
(1,508,330 | ) | | | | (1,508,330 | ) | |||||||||||||
Amortization of discount/ (premium) |
(24,771 | ) | (970 | ) | 2,070 | | (23,671 | ) | ||||||||||||
Paid-in-kind interest income |
| 580 | | | 580 | |||||||||||||||
Net realized gains |
101,885 | 8,750 | | | 110,635 | |||||||||||||||
Net change in unrealized appreciation/ (depreciation) |
530,708 | (6,074 | ) | 136,620 | 4,224 | 665,478 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, March 31, 2013 |
$ | 28,669,584 | $ | 3,950,116 | $ | 11,484,612 | $ | 28,360 | $ | 44,132,672 | ||||||||||
|
|
|
|
|
|
|
|
|
|
During the quarter ended March 31, 2013, the Company recorded $1,508,330 of transfer from Level 3 to Level 2 due to an increase of observable inputs in market data.
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended December 31, 2012:
Senior Secured Notes |
Senior Secured First Lien Term Loans |
Senior Secured Second Lien Term Loans |
Warrants/ Equity |
Total | ||||||||||||||||
Balance, December 31, 2011 |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchases |
23,691,208 | 3,941,316 | 2,900,000 | 20,152 | 30,552,676 | |||||||||||||||
Sales |
(1,007,500 | ) | (1,983,131 | ) | | | (2,990,631 | ) | ||||||||||||
Amortization of discount/ (premium) |
(14,224 | ) | (2,030 | ) | 3,899 | | (12,355 | ) | ||||||||||||
Paid-in-kind interest income |
| 3,911 | | | 3,911 | |||||||||||||||
Net realized gains |
22,500 | 2,565 | | | 25,065 | |||||||||||||||
Net change in unrealized appreciation/ (depreciation) |
(140,786 | ) | (1 | ) | 24,348 | (5,037 | ) | (121,476 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, December 31, 2012 |
$ | 22,551,198 | $ | 1,962,630 | $ | 2,928,247 | $ | 15,115 | $ | 27,457,190 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table presents the quantitative information about level 3 fair value measurements of our investments, as of March 31, 2013:
Fair value | Valuation techniques | Unobservable input | Range (weighted average) | |||||||
Senior secured first lien term loan |
$ | 3,950,116 | Market approach | Market yield Broker quotations |
7.0% - 11.1% (9.2%) N/A | |||||
Senior secured second lien term loan |
$ | 11,484,612 | Market approach | Market yield Broker quotations |
8.8% - 11.2% (10.0%) N/A | |||||
Senior secured notes |
$ | 28,669,584 | Market approach | Market yield Broker quotations |
6.0% - 18.0% (10.5%) N/A | |||||
Warrants/Equity |
$ | 28,360 | Enterprise valuation analysis | EBITDA multiple | 3.00x 3.50x (3.25x) |
F-16
Table of Contents
The following table presents the quantitative information about level 3 fair value measurements of our investments, as of December 31, 2012:
Fair value | Valuation techniques | Unobservable input | Range (weighted average) | |||||||||
Senior secured first lien term loan |
$ | 1,962,630 | Market approach | Market yield |
|
8.8% - 13.2% (10.8%) |
| |||||
Senior secured second lien term loan |
$ | 2,928,247 | Market approach | Market yield |
|
8.9% - 13.9% (10.5%) |
| |||||
Senior secured notes |
$ | 22,551,198 | Market approach | Market yield |
|
4.2% - 15.8% (12.0%) |
| |||||
Warrants/Equity |
$ | 15,115 | Enterprise valuation analysis | EBITDA multiple | 1x |
The significant unobservable inputs used in the fair value measurement of the Companys debt investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.
The significant unobservable inputs used in the fair value measurement of the Companys warrants/equity investments are comparable company EBITDA multiples. Significant increases in EBITDA multiples in isolation would result in significantly higher fair value measurements.
Note 5. Borrowings
As a BDC, the Company is only allowed to employ leverage to the extent that its asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that the Company employs at any time depends on its assessment of the market and other factors at the time of any proposed borrowing.
The fair value of the Companys debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys margin borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any.
The Company maintains custody accounts with prime brokers and custodians, including U.S. Bank N.A. and Barclays Capital Inc. (Barclays). The Company has a margin borrowing facility with Barclays (the Margin Facility) for investment purposes that is based on the fair value of investments held at Barclays as determined by Barclays. As of March 31, 2013, the Companys borrowings under the Margin Facility totaled $12,699,103 and were recorded as due to prime broker on the Companys statement of assets and liabilities. The Companys average outstanding borrowings for the quarter ended March 31, 2013 was $11,185,285. The interest rate charged is variable and ranges from LIBOR plus 0.25% to LIBOR plus 2.00%. The Companys weighted average interest rate on borrowings for the quarter ended March 31, 2013 was 1.02%.
Note 6. Agreements
Investment Advisory Agreement
On April 16, 2012, the Company entered into an investment advisory agreement (IAA) with SIC Advisors to manage the Companys investment activities. Pursuant to the IAA, SIC Advisors implements the Companys business strategy on a day-to-day basis and performs certain services for us, subject to oversight by the Companys board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the IAA, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of the Companys gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term gross assets includes any assets acquired with the proceeds of leverage. For the first quarter of the Companys operations, the base management fee was calculated based on the initial value of the Companys gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately prorated. For the quarter ended March 31, 2013, the Company recorded an expense for base management fees of $245,499 which remains payable at March 31, 2013.
F-17
Table of Contents
The incentive fee consists of the following two parts:
An incentive fee on net investment income (subordinated incentive fee on income) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to investors of 1.75% per quarter on the Companys net assets at the end of the immediately preceding fiscal quarter, or the preferred quarterly return. All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Companys pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.
A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will also become payable as of the effective date of such termination. The fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fee. Incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis. For the quarter ended March 31, 2013, the capital gains incentive fee payable to SIC Advisors was $0.
Under US GAAP, the Company calculates capital gains incentive fees as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the IAA. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable. For the quarter ended March 31, 2013, the Company recorded a provisional capital gains incentive fee of $148,636. As of March 31, 2013, the Company recorded a provisional incentive fee of $149,263 in its statement of assets and liabilities.
Under the terms of the IAA, SIC Advisors bears all organization and offering expenses on behalf of the Company. Upon such time that the Company has either raised $300,000,000 in gross proceeds in connection with the sale of shares of its common stock or the offering period has expired, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on behalf of the Company and the Company will be responsible for paying or otherwise incurring all such organization and offering expenses.
Pursuant to the terms of the IAA, the Company has agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by the Company over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended.
In the event that other organizational and offering expenses exceed 5.25% of the gross proceeds from the sale of shares of the Companys common stock pursuant to the Registration Statement or one or more private offerings at the time of the completion of the offering or other organizational and offering expenses, together with selling commissions, dealer manager fees and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of the Companys common stock pursuant to the Registration Statement or one or more private offerings at the time of the completion of the offering, then SIC Advisors shall be required to pay without reimbursement from the Company, or, if already paid by the Company, reimburse the Company, for amounts exceeding such 5.25% and 15% limit, as appropriate.
For the quarter ended March 31, 2013 and for the period from June 13, 2011 (inception) through December 31, 2012, SIC Advisors incurred organizational and offering costs of $201,454 and $2,984,677, respectively. Of the total $3,186,131 organizational and offering costs incurred from inception through March 31, 2013, $272,205 was reimbursed to SIC Advisors during the year ended December 31, 2012. For the quarter ended March 31, 2013, $137,477 was reimbursed to SIC Advisors and $40,690 has been accrued and is reflected in the statement of assets and liabilities as due to affiliate. The remaining unreimbursed amount will be eligible for reimbursement to the extent the Company receives subscriptions until April 16, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. Organizational and offering expenses paid for by SIC Advisors and reimbursed by the Company will be expensed on the Companys statement of operations.
F-18
Table of Contents
Administration Agreement
On April 5, 2012, the Company entered into an administration agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Companys behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors. For the quarter ended March 31, 2013, the Company recorded an expense of $138,090 relating to administrator expenses.
Expense Support and Reimbursement Agreement
On June 29, 2012, the Company entered into an Expense Support and Reimbursement Agreement (the Expense Support Agreement) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse the Company for operating expenses in an amount equal to the difference between distributions paid to the Companys stockholders in each month, less the sum of the Companys net investment income, the Companys net realized capital gains and dividends paid to the Company from its portfolio companies during such period (Expense Support Payment). To the extent that no dividends or other distributions are paid to the Companys stockholders in any given month, then the Expense Support Payment for such month shall be equal to such amount necessary in order for Available Operating Funds for the month to equal zero. The terms of the Expense Support Agreement commenced as of the date that the Companys registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012, at which point the Companys board of directors approved an amendment to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2013.
Pursuant to the Expense Support Agreement, the Company has a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of the Companys net investment income, the Companys net capital gains and the amount of any dividends and other distributions paid to the Company from its portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders. The purpose of the Expense Support Agreement is to cover distributions to stockholders so as to ensure that the distributions do not constitute a return of capital for GAAP purposes and to reduce operating expenses until the Company has raised sufficient capital to be able to absorb such expenses.
Pursuant to the Expense Support Agreement, the Company will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which the Company received net investment income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Companys stockholders during such calendar quarter (the Excess Operating Funds). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its operating expense ratio (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Companys stockholders is equal to or greater than the annualized rate of the Companys regular cash distributions to stockholders at the time the corresponding expense payment was incurred.
As of March 31, 2013, the Company recorded $997,095 in its statement of assets and liabilities as due from affiliate relating to the Expense Support and Reimbursement Agreement. For the quarter ended March 31, 2013, the Company recorded a Expense Support Payment reimbursement of $685,404 on the statement of operations. Expense reimbursements to SIC Advisors will be accrued as they become probable and estimable. For the quarter ended March 31, 2013, the Company did not record any Expense Repayments to SIC Advisors.
The following table provides information regarding expenses support payments incurred by SIC Advisors pursuant to the Expense Support Agreement as well as other information relating to our ability to reimburse the Companys advisor for such payments:
Quarter Ended |
Amount of Expense Payment Obligation |
Operating Expense Ratio (1) |
Annualized Distribution Rate (2) |
Eligible for Reimbursement Through | ||||||
June 30, 2012 |
$ | 454,874 | 6.13% | 8.00% | June 30, 2015 | |||||
September 30, 2012 |
437,303 | 4.05% | 8.00% | September 30, 2015 | ||||||
December 31, 2012 |
573,733 | 3.91% | 8.00% | December 31, 2015 | ||||||
March 31, 2013 |
685,404 | 1.71% | 8.00% | March 31, 2016 |
(1) | Operating Expense Ratio is as of the date the expense support payment obligation was incurred by our Advisor and includes all expenses borne by the Company, except for organizational and offering expenses, base management and incentive fees owed to SIC Advisors, and interest expense. |
(2) | Annualized Distribution Rate equals the annualized rate of distributions paid to stockholders based on the amount of the regular cash distribution paid immediately prior to the date the expense support payment obligation was incurred by SIC Advisors. Annualized Distribution Rate does not include special cash or stock distributions paid to stockholders. |
Note 7. Related Party Transactions
On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.
On March 31, 2012, SIC Advisors entered into a subscription agreement to purchase 1,108,033.24 shares of common stock for cash consideration of $10,000,000. The purchase was made on April 17, 2012. The consideration represents $9.025 per share.
Due from affiliate relates to Expense Support Payments as discussed in Note 6.
Due to affiliate relates to reimbursements of organizational and offering expenses paid to the Advisor as discussed in Note 6.
F-19
Table of Contents
An affiliate of the Companys dealer manager has an ownership interest in SIC Advisors.
Note 8. Directors Fees
The Companys independent directors receive an annual retainer fee of $30,000 and further receives a fee of $2,500 ($1,000 for telephonic attendance) for each regularly scheduled board meeting and a fee of $1,000 for each special board meeting and all committee meetings as well as reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attending each board or committee meeting. In addition, the chairman of the audit committee receives an annual retainer of $10,000, while the chairman of any other committee receives an annual retainer of $2,500. For the quarter ended March 31, 2013, the Company recorded an expense of $43,765 for directors fees.
Note 9. Earnings Per Share
In accordance with the provisions of ASC Topic 260 - Earnings per Share (ASC 260), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three months ended March 31:
Three months ended March 31 | ||||||||
Basic and diluted |
2013 | 2012 | ||||||
Net increase/(decrease) in net assets from operations |
$ | 1,391,187 | $ | (125,000 | ) | |||
Weighted average common shares outstanding |
3,226,281.1 | 110.8 | ||||||
Earnings per common share-basic and diluted |
$ | 0.43 | $ | (1,128.13 | ) |
Note 10. Commitments and Contingencies
As of March 31, 2013, the Company had no unfunded commitments under loan and financing agreements.
Note 11. Dividends
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Companys board of directors.
The Company has adopted an opt in distribution reinvestment plan (DRIP) pursuant to which the Companys common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Companys common stock. As a result, if the Company declare a cash dividend or other distribution, each stockholder that has opted in to the Companys reinvestment plan will have their distributions automatically reinvested in additional shares of the Companys common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the quarter ended March 31, 2013, the Company distributed a total of $644,868, of which, $492,004 was in cash and $152,864 was in the form of common shares.
The following table reflects the cash distributions per share that the Company declared or paid to its stockholders since it commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.
Record Date |
Payment Date | Amount per share |
||||||
July 13 and 31, 2012 |
August 1, 2012 | $ | 0.03333 | |||||
August 15 and 31, 2012 |
September 4, 2012 | 0.03333 | ||||||
September 14 and 28, 2012 |
October 1, 2012 | 0.03333 | ||||||
October 15 and 30, 2012 |
October 31, 2012 | 0.03333 | ||||||
November 15 and 29, 2012 |
November 30, 2012 | 0.03333 | ||||||
December 14 and 28, 2012 |
December 31, 2012 | 0.03333 | ||||||
January 15 and 31, 2013 |
January 31, 2013 | 0.03333 | ||||||
February 15 and 28, 2013 |
February 28, 2013 | 0.03333 | ||||||
March 15 and 29, 2013 |
March 29, 2013 | 0.03333 | ||||||
April 15 and 30, 2013 |
April 30, 2013 | 0.03333 | ||||||
May 15 and 31, 2013 |
May 31, 2013 | 0.03333 | ||||||
June 14 and 28, 2013 |
June 28, 2013 | 0.03333 |
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The Companys distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Company for investment. Any capital returned to stockholders through distributions will be distributed after payment of fees and expenses.
The Companys previous distributions to stockholders were funded from temporary fee reductions that are subject to repayment to our Adviser. These distributions were not based on our investment performance and may not continue in the future. If our Adviser had not agreed to make expense support payments, these distributions would have come from paid in capital. The reimbursement of these payments owed to the Adviser will reduce the future distributions to which investors would otherwise be entitled.
The determination of the tax attributes (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) of distributions is made annually as of the end of the Companys fiscal year based upon its taxable income for the full year and distributions paid for the full year.
Note 12. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2013:
Per share data(1): |
||||
Net asset value at beginning of period |
$ | 8.96 | ||
Net investment income/(loss) |
0.17 | |||
Net realized gains/(losses) on investments |
0.03 | |||
Net unrealized appreciation/(depreciation) on investments |
0.22 | |||
|
|
|||
Net increase/(decrease) in net assets |
0.42 | |||
Distributions declared from net investment income(2) |
(0.17 | ) | ||
Distributions from net realized capital gains |
(0.03 | ) | ||
|
|
|||
Total distributions to stockholders |
(0.20 | ) | ||
Net asset value at end of period |
9.18 | |||
Total return based on net asset value(3) |
4.73 | % | ||
Portfolio turnover rate |
10.83 | % | ||
Shares outstanding at end of period |
3,874,385 | |||
Net assets at end of period |
35,578,291 | |||
Ratio/Supplemental data (annualized): |
||||
Ratio of net investment income/(loss) to average net assets (4) |
7.63 | % | ||
Ratio of net expenses to average net assets(4) |
7.48 | % | ||
Supplemental data: |
||||
Ratio of operating expenses to average net assets |
5.36 | % | ||
Ratio of incentive fees to average net assets |
2.12 | % |
(1) | The per share data was derived by using the weighted average shares outstanding during the period from January 1, 2013 through March 31, 2013, which was 3,226,281. |
(2) | The per share data for distributions is the actual amount of paid distributions per share during the period. |
(3) | Total annual return is historical and assumes reinvestments of all dividends and distributions at prices obtained under the Companys dividend reinvestment plan, and no sales change for the period. |
(4) | Total return, ratio of net investment income/(loss), and ratio of net expenses to average net assets for the quarter ended March 31, 2013 prior to the effect of the Expense Support and Reimbursement Agreement were 2.71%, (2.24%), and 17.95%, respectively. |
Note 13. Subsequent Events
Management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the financial statements as of and for the quarter ended March 31, 2013, except as disclosed below.
The Company issued common shares and received gross proceeds of $11,804,248 subsequent to March 31, 2013.
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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| changes in the economy; |
| risk associated with possible disruptions in our operations or the economy generally; |
| the effect of investments that we expect to make; |
| our contractual arrangements and relationships with third parties; |
| actual and potential conflicts of interest with SIC Advisors and its affiliates; |
| the dependence of our future success on the general economy and its effect on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| the use of borrowed money to finance a portion of our investments; |
| the adequacy of our financing sources and working capital; |
| the timing of cash flows, if any, from the operations of our portfolio companies; |
| the ability of SIC Advisors to locate suitable investments for us and to monitor and administer our investments; |
| the ability of SIC Advisors and its affiliates to attract and retain highly talented professionals; |
| our ability to maintain our qualification as a RIC and as a BDC; and |
| the effect of changes in laws or regulations affecting our operations or to tax legislation and our tax position. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words trend, opportunity, pipeline, believe, comfortable, expect, anticipate, current, intention, estimate, position, assume, potential, outlook, continue, remain, maintain, sustain, seek, achieve, and similar expressions, or future or conditional verbs such as will, would, should, could, may, or similar expressions. The forward looking statements contained in this annual report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as Risk Factors in this annual report on Form 10-K.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.
Overview
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed by SIC Advisors which is a registered investment adviser under the Advisers Act. SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we intend to elect and qualify to be treated, for U.S. federal income tax purposes, as a RIC under subchapter M of the Code.
On April 17, 2012 we successfully reached the minimum escrow requirement and officially commenced operations by receiving gross proceeds of $10 million in exchange for 1,108,033.24 shares of our common stock sold to SIC Advisors.
Our investment objective is generate current income and, to a lesser extent, long-term capital appreciation. We intend to meet our investment objective by investing primarily in the debt of privately owned U.S. companies with a focus senior secured debt, second lien debt and, to a lesser extent, subordinated debt.
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We will originate transactions sourced through SIC Advisors network, and expect to acquire debt securities through the secondary market. Our debt investments may take the form of corporate loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by warrants, options or other forms of equity participation. We may separately purchase common or preferred equity interests in transactions.
The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. Based on prevailing market conditions, we anticipate that we will invest the proceeds from each subscription closing generally within 30-90 days. The precise timing will depend on the availability of investment opportunities that are consistent with our investment objective and strategies. Any distributions we make during such period may be substantially lower than the distributions that we expect to pay when our portfolio is fully invested.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in qualifying assets, including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, with certain limited exceptions. To obtain and maintain our RIC status, we must meet specified source-of-income and asset diversification requirements. To be eligible for tax treatment under Subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.
Revenues
We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. Original issue discounts and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
Expenses
Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement with SIC Advisors and our Administration Agreement with Medley Capital LLC. We bear other expenses, which include, among other things:
| corporate, organizational and offering expenses relating to offerings of our common stock, subject to limitations included in our Investment Advisory Agreement; |
| the cost of calculating our net asset value, including the related fees and cost of any third-party valuation services; |
| the cost of effecting sales and repurchases of shares of our common stock and other securities; |
| fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments; |
| interest payable on debt, if any, incurred to finance our investments; |
| transfer agent and custodial fees; |
| fees and expenses associated with marketing efforts; |
| federal and state registration fees and any stock exchange listing fees; |
| federal, state and local taxes; |
| independent directors fees and expenses, including travel expenses; |
| costs of director and stockholder meetings, proxy statements, stockholders reports and notices; |
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| costs of fidelity bonds, directors and officers/errors and omissions liability insurance and other types of insurance; |
| direct costs, including those relating to printing of stockholder reports and advertising or sales materials, mailing, long distance telephone and staff; |
| fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act and applicable federal and state securities laws; |
| brokerage commissions for our investments; |
| all other expenses incurred by us or the Advisor in connection with administering our investment portfolio, including expenses incurred by our Advisor in performing certain of its obligations under the Investment Advisory Agreement; and |
| the reimbursement of the compensation of our chief financial officer and chief compliance officer, whose salary is paid by Medley, to the extent that each such reimbursement amount is annually approved by our independent director committee and subject to the limitations included in our Administration Agreement. |
Reimbursement of Medley Capital LLC for Administrative Services
We reimburse Medley Capital LLC for the administrative expenses necessary for its performance of services to us. However, such reimbursement is made at an amount equal to the lower of Medley Capital LLCs actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.
Portfolio and Investment Activity
As of March 31, 2013, our portfolio consisted of investments in 40 portfolio companies with a fair value of $49,594,297, and was comprised of 80% Senior Secured first lien term loans, 23.2% Senior Secured second lien term loans, 68.7% senior secured notes and 0.1% warrants.
As of March 31, 2013, our income-bearing investment portfolio, which represented 99.9% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 10.5%, and 68.8% of our income-bearing portfolio bore interest based on fixed rates, and 31.2% of our income-bearing portfolio bore interest on floating rates, such as LIBOR.
The following table summarizes the amortized cost and the fair value of investments, not including cash and cash equivalents as of March 31, 2013:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior secured first lien term loans |
$ | | $ | | $ | 3,950,116 | $ | 3,950,116 | ||||||||
Senior secured second lien term loans |
| | 11,484,612 | 11,484,612 | ||||||||||||
Senior secured notes |
| 5,461,625 | 28,669,584 | 34,131,209 | ||||||||||||
Warrants/Equity |
| | 28,360 | 28,360 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 5,461,625 | $ | 44,132,672 | $ | 49,594,297 | ||||||||
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SIC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on the following categories, which we refer to as SIC Advisors investment credit rating:
Credit Rating |
Definition | |
1 | Investments that are performing above expectations. | |
2 | Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination or purchase.
| |
All new loans are rated 2. | ||
3 | Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected.
| |
Companies rated 3 may be out of compliance with financial covenants, however, loan payments are generally not past due. | ||
4 | Investments that are performing below expectations and for which risk has increased materially since origination or purchase. | |
Some loss of interest or dividend is expected, but no loss of principal.
| ||
In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). | ||
5 | Investments that are performing substantially below expectations and whose risks have increased substantially since origination or purchase.
| |
Most or all of the debt covenants are out of compliance and payments are substantially delinquent.
| ||
Some loss of principal is expected. |
The following table shows the distribution of our investments, not including cash and cash equivalents, on the 1 to 5 investment performance rating scale at fair value as of March 31, 2013:
Investment Performance Rating |
Investments at Fair Value |
Percentage | ||||||
1 |
$ | | | % | ||||
2 |
48,656,797 | 98.1 | ||||||
3 |
937,500 | 1.9 | ||||||
4 |
| | ||||||
5 |
| | ||||||
|
|
|
|
|||||
Total |
$ | 49,594,297 | 100.0 | % | ||||
|
|
|
|
Results of Operations
Operating results for the three months ended March 31, 2013 and March 31, 2012 are as follows:
For the three months ended March 31 | ||||||||
2013 | 2012 | |||||||
Total investment income |
$ | 1,058,077 | $ | | ||||
Total expenses, net |
523,844 | 125,000 | ||||||
Net investment income |
534,233 | (125,000 | ) | |||||
Net realized gains (losses) |
110,635 | | ||||||
Net unrealized gains (losses) |
746,319 | | ||||||
|
|
|
|
|||||
Net increase in net assets resulting from operations |
$ | 1,391,187 | $ | (125,000 | ) | |||
|
|
|
|
Investment Income
For the three months ended March 31, 2013, investment income totaled $1,058,077, of which $993,105 was attributable to portfolio interest, $64,710 was attributable to other fee income, and $262 to interest earned on cash and cash equivalents. For the three months ended March 31, 2012, we had no investment income since we had not yet commenced operations.
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Operating Expenses
Operating expenses for the three months ended March 31, 2013 and 2012 were as follows:
For the three months ended March 31 | ||||||||
2013 | 2012 | |||||||
Base management fees |
$ | 245,499 | $ | | ||||
Provisional incentive fees |
148,636 | | ||||||
Administrator expenses |
138,090 | | ||||||
Professional fees |
295,276 | | ||||||
Interest and financing expenses |
28,645 | | ||||||
Directors fees |
43,765 | | ||||||
Organizational and offering costs reimbursed to an affiliate |
178,167 | 125,000 | ||||||
General and administrative |
131,170 | | ||||||
|
|
|
|
|||||
Expenses before expense reimbursement |
$ | 1,209,248 | $ | 125,000 | ||||
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|
For the quarter ended March 31, 2013 total expense reimbursement from SIC Advisors pursuant to the Expense Support and Reimbursement Agreement was $685,404. For the quarter ended March 31, 2013 net expenses after taking into account the expense reimbursement from SIC Advisors, was $523,844.
Expense Support and Reimbursement Agreement
On June 29, 2012, we entered into an Expense Support and Reimbursement Agreement (the Expense Support Agreement) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse us for operating expenses in an amount equal to the difference between our distributions paid to stockholders in each month, less the sum of our net investment income, our net realized capital gains and dividends paid to us from our portfolio companies during such period. The terms of the Expense Support Agreement commenced as of the date that our registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012, at which point the board of directors approved an amendment to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2013.
Pursuant to the Expense Support Agreement, we have a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of our net investment income, net capital gains and the amount of any dividends and other distributions paid to us from our portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to stockholders. The purpose of the Expense Support Agreement is to cover distributions to stockholders so as to ensure that the distributions do not constitute a return of capital for GAAP purposes and to reduce operating expenses until we have raised sufficient capital to be able to absorb such expenses.
Pursuant to the Expense Support Agreement, we will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which we received net investment income, net capital gains and dividends from our portfolio companies in excess of the distributions paid to stockholders during such calendar quarter (the Excess Operating Funds). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, we will only make reimbursement payments if our operating expense ratio is equal to or less than our operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of our regular cash distributions to stockholders is equal to or greater than the annualized rate of our regular cash distributions to stockholders at the time the corresponding expense payment was incurred.
As of March 31, 2013, we recorded $997,095 in our statement of assets and liabilities as due from affiliate relating to the Expense Support Agreement. For the three months ended March 31, 2013, we recorded an expense reimbursement of $685,404 on the statement of operations. Expense reimbursements to SIC Advisors will be accrued as they become probable and estimable. For the three months ended March 31, 2013, we did not record any expense reimbursements to SIC Advisors.
Net Realized Gains/Losses from Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.
During the three months ended March 31, 2013 we recognized $110,635 of realized gains on our portfolio investments.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation on investments reflects the net change in the fair value of our investment portfolio. For the three months ended March 31, 2013, we had unrealized appreciation of $746,319 on our portfolio investments.
Changes in Net Assets from Operations
For the three months ended March 31, 2013, we recorded a net increase and decrease in net assets resulting from operations of $1,391,187. Based on 3,226,281.1 weighted average common shares
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outstanding for the three months ended March 31, 2013, our per share net increase and decrease in net assets resulting from operations was $0.43.
Financial Condition, Liquidity and Capital Resources
As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital; including raising equity, increasing debt, and funding from operational cash flow.
Our liquidity and capital resources have been generated primarily from the net proceeds of our public offering of common stock and borrowings pursuant to the prime brokerage account we have with Barclays Capital, Inc.
As of March 31, 2013, we had $3.9 million in cash and cash equivalents. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow.
On April 24, 2012, we entered into a prime brokerage services agreement (PBSA) with Barclays Capital Inc. (Barclays) whereby Barclays provides financing for some portion of our Senior secured note. Under the terms of the PBSA, we are required to post a specified amount of collateral, in accordance with the margin requirements described in the agreement, generally between 20% and 50% of the market value of each Senior secured note as determined by Barclays. To secure the performance of our obligations under the PBSA, Barclays has been granted a first priority security interest and lien on all of the assets covered by the PBSA. Neither the cash collateral posted as margin nor our other assets covered by the PBSA are available to pay our debts. As of March 31, 2013, our borrowings under the Margin Facility totaled $12,669,103 and were recorded as due to broker on our statement of assets and liabilities. Our average outstanding borrowings for the quarter ended March 31, 2013 was $11,185,285. The rate is variable and ranges from LIBOR plus 0.25% to LIBOR plus 2.00%. We may use leverage that increases the effect of any investment fair value changes on capital.
Contractual Obligations and Off-Balance Sheet Arrangements
We have entered into certain contracts under which we have material future commitments. On April 5, 2012, we entered into the Investment Advisory Agreement with SIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. SIC Advisors serves as our investment advisor in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance.
On April 5, 2012, we entered into the administration agreement with Medley Capital LLC pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.
If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
Off-Balance Sheet Arrangements
Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.
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Distributions
We intend to elect to be treated, beginning with our fiscal year ending December 31, 2012, and intend to qualify annually thereafter, as a RIC under the Code. To obtain and maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.
While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
Subject to our board of directors discretion and applicable legal restrictions, we expect to authorize and pay monthly distributions to our stockholders. Any distributions to our stockholders will be declared out of assets legally available for distribution. We expect to continue making monthly distributions unless our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from doing so. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. We expect that for a significant time after the commencement of this offering, substantially all of our distributions will result from expense support payments made by SIC Advisors that may be subject to repayment by us within three years. The purpose of this arrangement is to avoid such distributions being characterized as returns of capital for GAAP purposes. We may still have distributions which could be characterized as a return of capital for tax purposes. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or SIC Advisors continues to make expense support payments under the Expense Support Agreement. Any future reimbursements to SIC Advisors will reduce the distributions that would otherwise receive by stockholders. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all. SIC Advisors has no obligation to make expense support payments pursuant to the Expense Support Agreement after June 30, 2013, unless the Expense Support Agreement is extended. For the three months ended March 31, 2013, if expense support payments of $685,404 were not made by SIC Advisors, 100% percent of the distribution rate would have been a return of capital.
Our distributions may exceed our earnings, which we refer to as a return of capital, especially during the period before we have invested substantially all of the proceeds of this offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. Our use of the term return of capital merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore investors are advised that they should be aware of the differences with our use of the term return of capital and return on capital.
The following table reflects the cash distributions per share that we have declared or paid to our stockholders since we commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.
Record Date |
Payment Date | Amount per share | ||||
July 13 and 31, 2012 |
August 1, 2012 | $ | 0.03333 | |||
August 15 and 31, 2012 |
September 4, 2012 | 0.03333 | ||||
September 14 and 28, 2012 |
October 1, 2012 | 0.03333 | ||||
October 15 and 30, 2012 |
October 31, 2012 | 0.03333 | ||||
November 15 and 29, 2012 |
November 30, 2012 | 0.03333 | ||||
December 14 and 28, 2012 |
December 31, 2012 | 0.03333 | ||||
January 15 and 31, 2013 |
January 31, 2013 | 0.03333 | ||||
February 15 and 28, 2013 |
February 28, 2013 | 0.03333 | ||||
March 15 and 29, 2013 |
March 29, 2013 | 0.03333 | ||||
April 15 and 30, 2013 |
April 30, 2013 | 0.03333 | ||||
May 15 and 31, 2013 |
May 31, 2013 | 0.03333 | ||||
June 14 and 28, 2013 |
June 28, 2013 | 0.03333 |
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We have adopted an opt in distribution reinvestment plan pursuant to which our common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declare a cash distribution, stockholders that have opted in to our distribution reinvestment plan will have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.
Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.
Related Party Transactions
On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.
On April 17, 2012, SIC Advisors purchased 1,108,033.24 shares of our common stock for aggregate gross proceeds of $10,000,000. The consideration represents $9.025 per share.
We have entered into an Investment Advisory Agreement and Expense Support and Reimbursement Agreement with SIC Advisors in which our senior management holds an equity interest. Members of our senior management also serve as principals of other investment managers affiliated with SIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.
We have entered into a dealer manager agreement with SC Distributors, LLC and pay them a dealer manager fee of up to 2.75% of gross proceeds raised in the offering. An affiliated entity of SC Distributors, LLC owns an equity interest in SIC Advisors, which provides the right to receive a fixed percentage of the management fees received by SIC Advisors.
We have entered into a license agreement with SIC Advisors under which SIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name Sierra for specified purposes in our business. Under this agreement, we will have a right to use the Sierra name, subject to certain conditions, for so long as SIC Advisors or one of its affiliates remains our investment advisor. Other than with respect to this limited license, we will have no legal right to the Sierra name.
Management Fee
We pay SIC Advisors a fee for its services under the Investment Advisory Agreement. The fee consists of two components: a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of :
| An incentive fee on net investment income (subordinated incentive fee on income) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to investors of 1.75% per quarter on the Companys net assets at the end of the immediately preceding fiscal quarter, or the preferred quarterly return. All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Companys pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved. |
| A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will also become payable as of the effective date of such termination. The fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fee. Incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis. |
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Under the terms of the Investment Advisory Agreement, SIC Advisors bears all organization and offering expenses on our behalf. Upon such time that we have raised $300 million in gross proceeds in connection with the sale of shares of our common stock, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on our behalf, and we will be responsible for paying or otherwise incurring all such organization and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we have agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended. Notwithstanding the foregoing, in the event that organizational and offering expenses, together with sales commissions, the dealer manager fee and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of our common stock pursuant to our registration statement or otherwise at the time of the completion of our offering, then SIC Advisors shall be required to pay or, if already paid by us, reimburse us for amounts exceeding such 15% limit.
Critical Accounting Policies
This discussion of our expected operating plans is based upon our expected financial statements, which will be prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future financial statements.
Valuation of Investments
We measure the value of our investments in accordance with fair value accounting guidance promulgated under GAAP, which establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices, generally, will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value will be classified and disclosed in one of the following categories:
Level 1 Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and publicly listed derivatives will be included in Level 1. In addition, securities sold, but not yet purchased and call options will be included in Level 1. We will not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.
Level 2 Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments which are generally expected to be included in this category include corporate bonds and loans, convertible debt indexed to publicly listed securities, and certain over-the-counter derivatives.
Level 3 Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments that are expected to be included in this category are our private portfolio companies.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider factors specific to the investment.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK
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interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Payment-in-Kind Interest
We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
Organization and Offering Expenses
Organization and offering expenses are expensed by SIC Advisors, and we may be required to reimburse SIC Advisers for such expenses subject to the terms of the Investment Advisory Agreement. Until such time that we raise $300 million in gross proceeds in connection with the sale of shares of our common stock, continuous offering expenses will be expensed by SIC Advisors. After such time, continuous offering expenses, excluding sales load, will be capitalized on our balance sheet as deferred offering expenses and expensed to our statement of operations in the period incurred.
Federal Income Taxes
We intend to elect to be treated for federal income tax purposes, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
Recent Developments
We do not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on our condensed financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates. Pursuant to the Prime Brokerage Services Agreement, we post a specified amount of collateral, in accordance with the margin requirements described in the agreement, generally between 20% and 50% of the market value of each secured bond investment as determined by Barclays, in exchange for Barclays agreeing to provide financing for some portion of our senior secured note investments. As a result, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.
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Item 4: Controls and Procedures.
Disclosure Controls
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.
Change In Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1: | Legal Proceedings. |
We are not currently subject to any legal proceedings, nor, to our knowledge, are any legal proceedings threatened against us or our subsidiaries.
Item 1A: | Risk Factors. |
In addition to other information set forth in this report, you should carefully consider the Risk Factors discussed in our final annual report on Form 10-K filed with the SEC on March 15, 2013, which could materially affect our business, financial condition and/or operating results. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results. There has been no material changes in the risk factors included in our prospectus, as amended or supplemented.
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3: | Defaults Upon Senior Securities. |
None.
Item 4: | Mine Safety Disclosures. |
None.
Item 5: | Other Information. |
None.
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Item 6: | Exhibits. |
EXHIBIT INDEX
Number |
Description | |
31.1 | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 9, 2013 | Sierra Income Corporation. | |||
By | /s/ Seth Taube | |||
Seth Taube Chief Executive Officer (Principal Executive Officer) | ||||
Dated: May 9, 2013 | By | /s/ Richard T. Allorto, Jr. | ||
Richard T. Allorto, Jr. Chief Financial Officer (Principal Accounting and Financial Officer) |
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